Mission Hen, LLC v Lee (In re Lee)

Affirming the bankruptcy court and the Ninth Circuit Bankruptcy Appellate Panel (the BAP), the Ninth Circuit (the Circuit Court) recently decided two significant issues: (1) that the long-standing holding of In re Scovis, 249 F. 3d 975, 983 (9th Cir. 2001) – that normally the eligibility of a chapter 13 debtor is determined by the original schedules if filed in good faith – remains the prevailing standard; and (2) that under 11 U.S.C.§ 1322(c)(2), if the last payment on debt secured solely by the principal residence is due before the end of the plan term, the plan may modify the secured portion based on the property value and pay that portion through the plan. In other words, that undersecured debt may be crammed down in the chapter 13 plan. Mission Hen, LLC v Lee (In re Lee),  ___ F. 4th ___, 2025 WL 1463294 (9th Cir. May 22, 2025).  View the opinion here.

Facts

Debtors Jason Lee and Janice Chen (Debtors) filed a petition for chapter 13 bankruptcy on January 26, 2022.  Schedule D (showing secured debt) listed their residence (the Residence) at a value of $1,045,000, with a fully secured first  mortgage of $951,510.26 and a partially secured second mortgage held by Mission Hen, LLC of $465,670, $92, 489 secured and $373,180 unsecured. In a subsequently filed motion to value the Residence, the debtors asserted they were entitled to cram down the Mission Hen mortgage based on the Residence’s value under § 1322(c)(2) of the Bankruptcy Code.                                                                                                                                                                                                                                                                                                                        This assertion was consistent with Schedule D, with only $92,489 secured based on the valuation in the initial schedules.  Mission Hen opposed, asserting that proper valuation of the Residence would show their claim was fully secured. The bankruptcy court held an evidentiary hearing and valued the property at $1,225,000, which left Mission Hen with a secured claim of $265, 473 and an unsecured claim of about $200,000. 

Debtors filed an amended plan with those valuations, supported by a declaration from Linda Chen’s mother which declared that she lived in the house and would increase her rental payment during the life of the plan so that Debtors had the necessary cashflow to pay the Mission Hen secured claim in full under the plan.  In response to the amended plan, Mission Hen objected for the first time to Debtors’ eligibility based on the initial schedules which showed the total unsecured debt exceeded the debt limit of $419,275 set by § 109(e) when the unsecured portion of its debt was added to the listed unsecured debt in schedule F.   It also argued that the cramdown in the plan was a violation of § 1322(b)(2), which prohibits modification of liens that are secured only by a debtor’s principal residence.  Finally, it asserted that the plan was not feasible.

The bankruptcy court resolved all of Mission Hen’s objections in Debtors’ favor and confirmed the plan.  Mission Hen appealed to the BAP, which affirmed.  It then appealed to the Circuit Court, which also affirmed.

Reasoning

Eligibility

Section 109(e), as applicable when Debtors filed chapter 13, provided “Only… an individual … that owe[s] on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $419,275…may be a debtor under chapter 13 of this title.” 11 U.S.C. § 109(e) (2019) (dollar amount adjusted in 2022).  The bifurcated portion of the Mission Hen mortgage is counted as unsecured for eligibility purposes.  Scovis, 249 F. 3d at 983.  Mission Hen claimed that using the valuation in the initial schedules of $1,045,000, the unsecured portion of its debt meant the total unsecured debt exceeded the limit.

The Ninth Circuit noted its seminal case on chapter 13 eligibility, Scovis, which held that “eligibility should normally be determined by the debtor’s originally filed schedules, checking only to see if the schedules were made in good faith.”  249 F. 3d at 982 (emphasis in the opinion). But both the bankruptcy court and the BAP concluded that this case was not “normal.”  Here, Mission Hen did not raise eligibility until after the valuation hearing and the Debtors had filed their amended plan based on the court’s valuation, seven months after the filing date. In fact Mission Hen admitted that it did not raise eligibility until late for “strategic reasons.” 

The Circuit Court agreed with the BAP that in this circumstance it would be absurd to require the court to use the earlier-filed schedules and disregard its valuation.  The bankruptcy court had relied on that valuation when it found the Debtors eligible.  Under its valuation, the unsecured portion of approximately $200,000 left the Debtors well under the limit. The Circuit Court concluded “ in the circumstances of this case …strict adherence to the generally applicable Scovis rule would result in an inaccurate valuation of the Property and undermine the goals of Chapter 13.”  The Circuit reinforced the applicability of Scovis but found this case was not “normal” and the bankruptcy court’s determination stood.

Feasibility

This portion of the Circuit Court’s opinion is factually intense and not significant to this review.  However, suffice it to say that the Circuit Court looked at the evidence, in particular the mother’s declaration and the Debtors’ budget, and used simple arithmetic to affirm the bankruptcy court when it overruled the objection.

Anti-Modification Provision of § 1322(b) in Light of § 1322(c)(2)

Section 1322(b)(2) provides that a chapter 13 plan may modify the rights of holders of secured claims except those whose  only security interest is the debtor’s principal residence.  The Circuit Court acknowledged that a significant Supreme Court case, Nobelman v. American Savings Bank, 508 U.S. 324, 332 (1993), had held that § 1322(b)(2) prevented bifurcation of a secured claim on the Residence.  However, after Nobelman was decided, Congress amended the section by adding § 1322(c)(2) which provides:

(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law….

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.”

(emphasis in the opinion)

The Circuit Court recognized that the controversy regarding application of this subsection turned on whether “payment of the claim as modified” referred only to modification of the payment or modification of the entire claim.  It joined three other circuits – the Fourth, Fifth, and Eleventh – in holding that it referred to the entire claim and allowed for bifurcation as was done here.  Its ruling was based on statutory interpretation and recognized that the words “notwithstanding subsection (b)(2)”  were meant to create an exception to the nonbifurcation language of (b)(2).  In addition § 1325(a)(5), referenced in the subsection, specifically addresses the right to cram down secured claims to the value of the collateral.

Author’s Comments

It is significant that the Ninth Circuit stood by its Scovis standard for determining chapter 13 eligibility in the usual case.   Chapter 13 cases are intended to move quickly toward confirmation, with prompt deadlines for filing the plan, filing claims, and holding confirmation hearings.  It is important to assess eligibility, if at all, before substantial work has been done on the case by debtors, trustees, and creditors.  Scovis has allowed this prompt determination to take place for the last 25 years and Lee says that practice may continue.

When I  was on the bench, the application of § 1322(c)(2) came up infrequently but I always thought it was intended to override the restrictions of subsection (b)(2) based on the plain language, in particular “notwithstanding” and the reference to subsection 1325(a).  Therefore, I applaud the Ninth Circuit for joining the only other circuits which have ruled on the issue to allow cramdown in the appropriate case.  The limiting factor for its frequent application is that the entirety of the secured portion must be paid off over the plan term, something few debtors are able to do. 

[The Commercial Finance Newsletter is written by an ad hoc group of layers in the Business Law Section of the California Lawyers Association.  This review was written by the Hon. Meredith Jury, U.S. Bankruptcy Judge, Central District of California (Ret.), a member of the ad hoc group.   The opinions contained herein are solely those of the author.]